Author Question: How does the size of the deadweight loss from a tax depend on the price elasticities of supply and ... (Read 31 times)

dalyningkenk · **on:** Jun 30, 2018

How does the size of the deadweight loss from a tax depend on the price elasticities of supply and demand?

Question 2

Critics of inflation targeting will argue that central banks need flexibility.
a. True
b. False
Indicate whether the statement is true or false

briezy · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Other things being equal, the less elastic the demand curve, the smaller the deadweight loss. Similarly, the less elastic the supply curve, other things being equal, the smaller the deadweight loss. However, when the supply and/or demand curves become more elastic, the deadweight loss becomes larger, because a given tax reduces the quantity exchanged by a greater amount.

Answer to Question 2

True